Ireland: New Options Emerging As Non-Traditional Credit Grows Share Of Irish Market

Last Updated: 14 March 2016
Article by Peter O'Brien

With credit availability expected to increase in 2016 Peter O'Brien and Grace Kelly analyse the growth of non-bank credit in Ireland, the European Union's moves in the area and the new borrowing options emerging for corporates from both private and public sources as non-traditional lenders enter the market.

The general outlook for the Irish market is that credit availability (and particularly real estate credit availability) will continue to increase in 2016. The source of this credit, however, is shifting away from solely traditional lenders to a mixture of banks, mezzanine lenders and non-bank lenders.

Internationally, global political and economic tension could influence the global lending market but the outlook for real estate finance in Europe is perceived to be bright.  Prime property, often in so called "safe haven" cities, is still considered to have potential for growth in 2016 and a shortage of suitable assets together with over heated competition is generally identified as the greatest challenge to the European real estate market for the year ahead.

Non-bank lending

While we expect more traditional credit to become available in Ireland this year than in recent years, banks can still be reluctant to finance the entirety of a project (often preferring to part-finance an acquisition or to lend in conjunction with others) and corporate borrowers are becoming increasingly aware of non-bank borrowing options. Critics sometimes refer to this non-bank lending market as "shadow banking".  Non-bank lenders are typically investors and institutions which are willing to lend and can include hedge funds, pension funds and insurance companies.

Non-bank lenders seeking to diversify their investments can provide an important alternative source of credit for borrowers in sectors which require long term debt and which are able to provide appropriate levels of security, such as borrowers investing in prime real estate.

At the European Financial Forum in Dublin Castle in January this year, the new Governor of the Central Bank, Professor Philip Lane, expressed the view that Europe is overly dependent on the banking sector and that that the policy regime should support a greater role for non-bank providers of debt and equity financing. The Bank for International Settlements has previously released data showing that over the last decade, European businesses have relied on traditional bank credit for approximately 80% of their funding requirements.  Irish SMEs were arguably too reliant on bank lending and as a result, were disproportionately affected by our banking sector difficulties in terms of their ability to access or renew credit.

Corporate finance in Europe and Ireland is not likely to mirror the US lending market, where non-bank financing (including non-bank lending) accounts for an estimated 80% to 90% of corporate funding. However, despite renewed lending in Ireland, increased regulatory pressure on banks as a whole to deleverage and reduce their loan books could leave a gap in the market which non-bank lenders can take advantage of.

Of course, such lenders are also limited by applicable regulation. For example, only certain types of investment funds are authorised by the Central Bank of Ireland to originate loans. Pension funds and insurance companies are subject to their own regulation and investment limitations.

Increased supervision of non-bank lending is also probably imminent.  The European Central Bank has noted that the push towards market based financing could lead to systemic risk building up in parts of the financial system which are seen as opaque and less regulated. Recent reports put Ireland in third place (alongside China) and behind the US and UK in terms of shadow banking activity, on the basis that there is €2.3 trillion of assets in the Irish shadow banking system. However, as Michael Noonan pointed out in Dáil debates on the matter, about 85% of that amount is subject to other forms of regulation and the majority of the assets and liabilities of the entities involved are located outside of Ireland.

At present, the European Commission is working towards the creation of the Capital Markets Union (CMU).  The CMU is a collection of ideas and initiatives aimed at (among other things) boosting non-bank lending for businesses in Europe.  This includes cultivating more financing from investment funds and encouraging public investment through initiatives such as the European Fund for Strategic Investment.

The CMU aims to make access to finance more harmonised in Europe so that borrowers have a wider pool of investors from whom to seek credit.

Peer to peer lending

Interestingly, the CMU includes peer to peer lending as a growth area for alternative funding. This area is completely unregulated in Ireland (as the Central Bank of Ireland pointed out to Irish consumers in 2014) but the European Commission has identified it as a method of involving households in financing the real economy while reducing reliance on traditional banks. Candidates in the General Election were alive to the potential for growth in this area. As part of its election manifesto, for example, Renua had promised to establish a new peer to peer lending platform for Irish businesses which would operate independently from banks.  Fine Gael promised to boost alternative sources of credit by €1 billion per year if re-elected, including through peer to peer lending. In the UK, peer to peer lending has become more mainstream and is no longer considered to be alternative lending. Some banks are reported to be partnering with peer to peer lenders and referring borrowers to them where the bank cannot provide the required funding. However, the risks of such an unregulated activity are very real, as highlighted by a recent peer to peer lending scandal in China, where social lending platform Ezubo is under investigation for conducting a Ponzi scheme which lost $7.6 billion of investors' money.

Cultural factors

While we are aware of borrowers in the market having chosen non-bank lenders (in one case an insurance company) over traditional banks for credit, there may be an argument that if a borrower suffers financial difficulty and needs to re-negotiate with its creditor, a traditional banking relationship between a borrower and its bank could be more robust than the relationship between that borrower and a new non-bank lender.  Cultural factors also play a part, as Irish borrowers may believe that a historic relationship between the lender and borrower can assist in these circumstances.

Documents and structure

Non-bank lenders often prefer a fixed rate of return and the interest rates on non-bank lending are typically higher than those for traditional bank loans. This could reflect the higher risk to return requirements for non-bank lenders or their internal rate of return. However, some non-bank lending can be more flexible in other respects. In the US and UK for example, non-bank lending (particularly from private equity firms) is sometimes described as "covenant-lite" meaning that the usual covenants relied on by lenders for protection in case financial circumstances change are waived or are more borrower friendly.

The loan structure in non-bank lending can differ from traditional club or syndicated loans. Non-bank lenders may not have access to the same administrative functions as a traditional lender so loans are often on a bilateral basis or from a small pre-agreed group of lenders. They are typically straightforward term loans with one drawdown and often sit alongside a borrower's other financings. For example a borrower may also have revolving facilities from a traditional bank for working capital purposes. Interest or exchange rate hedging, if required, would also typically be provided by a traditional bank.

From the lawyers' perspective, this impacts on the type of documentation used to document the facilities. The UK and US have seen an increase in "covenant-lite" loans and there has been an increase in unitranche loan facilities in the UK and US markets when non-bank lending occurs. These are usually simplified single tranche facilities combining senior and junior risk and having a single interest rate (sometimes comprising a blended senior and junior rate) which simplifies the layers in a borrower's capital structure.

Public investment

Public initiatives in the non-bank lending sphere also offer an alternative source of credit for borrowers. The Strategic Banking Corporation of Ireland (SBCI) is a non-bank lender although it partners with other (often traditional) lenders for on-lending purposes. It was incorporated in September 2014 to offer lower cost funding for Irish SMEs and started its lending programme in March 2015 through its initial on-lending partners, AIB and Bank of Ireland. SBCI is funded by the European Investment Bank, KfW Group (the development bank owned by the Federal Republic of Germany and its states) and the Ireland Strategic Investment Fund, a new fund to which the assets of the National Pensions Reserve Fund were transferred, and which focuses on investment designed to support the Irish economy.

It is estimated that up to the third quarter of 2015, approximately €110 million in SME loans from the SBCI were drawn down by about 3,200 SMEs engaged in a variety of businesses. Last year the SBCI announced on-lending agreements with two non-bank lenders as well as an additional €200 million facility available to Irish businesses seeking lower cost working capital, business investment, agriculture and refinancing loans. The SBCI is in discussions with a number of other bank and non-bank lenders in relation to further on-lending arrangements, giving borrowers further credit options. Fianna Fáil, in its election documentation, proposed converting the SCBI into a fully licenced state bank so it may not technically be categorised as a non-bank lender in future.

Conclusion

Enthusiasm for lending to Irish businesses is picking up, particularly for businesses engaged in commercial real estate. We expect this to continue based on market predictions for Ireland and notwithstanding global uncertainty and its potential impact on the lending market in the coming year.

However, new borrowing options are emerging for Irish businesses, whether Irish public initiatives aimed at SMEs, sector specific infrastructure projects funded by the European Fund for Strategic Investment or general corporate lending from institutional and other alternative lenders. In light of the European Commission's push to broaden the lending base across Europe through the establishment of the CMU, it will be interesting to see if in Ireland we experience a shift towards a wider lending marketplace with a variety of non-traditional lenders and what the resulting changes in the transaction documentation and structures will be.

This article first appeared in Finance Dublin March 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions